Policy Choices in the Newly Industrializing Countries

8/12/2019 Policy Choices in the Newly Industrializing Countries

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Policy eseArch ndExtfmal Afairs

WORKING PAPERS

Office fthe Vic Prsident

Development Economics

The World BankMay 1990WPS 432

Policy Choicesin the

Newly IndustrializingCountries

Bela Balassa

The Far Eastern newly industrializing countries (Hong Kong,Korea, Singapore, and Taiwan) achieved much larger increasesin per capita incomes than their Latin American counterparts(Argentina, Brazil, Chile, and Mexico) in the 1963-88 period.Differences in economic growth rates find their origin in differ-ences in savings ratios and investment efficiency.

The Pohcy. Research, nd Extemal Affairs Complex distrbutes PRI: Working Papers o d&sseminate he findLngs f work in progressand o encourage the exchange f ideas among Bank staff and all others nterested n development ssues These apers arry he namesof he authors eflect only their views, and should he used and citod accordingly. Thc findings. nterpretimsan and conclusions rmheauthors own. They should not he autnbuted o the World Blank. ts Board of Directors, s managenent. r ar 1 'f its member countnes


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The Far Eastem newly industrializing countries product. Export expansion involved an increas-(Hong Kong, Korea, Singapore, -.nd Taiwan) ing shift toward manufactured goods.achieved much larger increases in per capitaincomes than their Latin American counterparts Exports in the Far Eastem newly industrial-(Argentina, Brazil, Chile, and Mexico) in the izing countries were promoted by the system of1963-88 period. Differences in economic incentives that entailed no discrimination, orgrowth rates find their origin in differences in little discrimination, against exports. Thesesavings ratios and investment efficiency. countries also relied to a considerable extent on

export promotion in response to extemal shocksWhile savings rates differed little between and did not engage in excessive foreign borrow-

the two groups of countries between 1963 and ing.1973, these ratios increased substantially in theFar Eastern NICs in subsequent years as they The experience ol the Far Eastem and Latinemployed measures encouraging savings. American newly industrializinig countriesSimilar increases did not occur in Latin America provides important lessons to other developingwhere the policies applied were not favorable to countries. It indicates the superiority of out-savings. ward-oriented policies that provi(le similar in-

centives to exports and to import substitution. ItInvestment efficiency was higher in the Far also shows that the continuation of outward-ori-

Eastem NICs than in the Latin American NICs ented policies penmits overcoming the effects ofthroughout the period. The Far Eastern NICs extemal shocks while reliance on extemal bor-achieved high levels of investment efficiency in rowing reinforces the adverse effects of these

the framework of an open economy, with high shocks.and rising ratios of exports to the g Dss domestic

The PRE Working Paper Series disseminates he findings of wxork nder way in the Bank's Policy, Research, and FxternalAffairs Complex. An objective of the series s to get these indings out quickly, even f presentations re ess h.an uillypolished. The findings, nterpretations, nd conclusions n these papers do not necessarily epresent fficial Bank policy.

Produced t the PRE Dissemination Centcr


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POLICY CHOICES IF NEWLY INDUSTRIALIZING OUNTRIES

Bela Balassa

Table of Contents

Page No.

I. Intrcduction ............................... 1

II. Growth Performance ... . . . . . . . . . . . . . . . . . 1

III. Domestic Savings and the Efficiency of Investment . . . . . 3

IV. The Role of Exports . . . . . . . . . . . . . . . . . . . 4

V. The Policies Ap 1 ied . . . . . . . . . . . . . . . . . . . 9

VI. Conclusions . . . . . . . . . . a . . a . a . . 17

* The authur is Professor of Political conomy at the J,ans Hopkins Universityand Consultant to the World Bank. He prepared this paper for the Conference"Attempts t Liberalization: Hungarian conomic Polic:y nd InternationalExperience," eld in Budapest, ungary on November 16-a8, 1989. The author isindebted to Vinod Thomas for helpful comments and to Shigeru Akiyama forresearch assistance.


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POLICY CHOICES IN THE NEWLY INDUSTRIALIZING OUNTRIES

Bela Balassa

I. Introduction

This paper will compare the policies nd economic performance f

newly-industrializing ountries (NICs) in the Far East and Latin America i.

the 1963-88 period. The two groups of countries nclude Hong Kong, Korea,

Singapore, nd Taiwan and Argentina, Brazil, Chile, and Mexico.

Information ill be provided on indicators f economic growth as well

as on domestic savings ratios, the efficiency f investment, nd export

performance. Next, the results will be explained n terms of the policies

applied.

II. Growth Performance

The Far Eastern newly industrializing ountries had relatively low

income levels in 1963. Even Hong Kong and Singapore ere behind Argentina,

Chile, and Mexico in terms of income per head (Table 1).

The situation hanged dramatically n the following wo-and-a-half

decades. By 1988, all four of the Far Eastern NICs surpassed he per capita

incomes of every Latin American newly industrializing ountry. These changes

occurred as the per capita income of the four Far Eastern NICs increased our-

and-a-half to six times during the 1963-87 period. Among Latin American NICs

per capita incomes increased wo-and-a-half imes in Brazil, one-and-a-half

times in Mexico and by less than one-quarter n Argentina and Chile.

Further interest attaches to intercountry ifferences n increases in

per capita incomes over time. Table 1 provides data for the benchmark years

of the 1963-73 period of world economic boom, the 1973-81 period of two oil

shocks, and the 1981-87 period of the debt crisis.


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Table 1

Cross Domestic Product per Capita(U.S. dollars)

At ExchangeAt Purchasing ower Parities in 1900 prices Rates

1963 1973 1981 1988 1988/1963 1988

Hong Kong 2247 4552 7751 11952 5.32 9600Korea 747 1553 2457 4094 5.48 4082

Singapore 1777 3838 6308 11693 6.589009

Taiwan 980 1976 3029 4607 4.70 5862

Argentina 2949 4157 3935 3474 1.18 2806Brazil 1400 2338 3252 3424 2.45 2454Chile 3231 3502 4443 3933 1.22 1732Mexico 2312 3403 4576 3649 1.58 2114

Sources: 1963-81 figures from Summers, R. and A. Heston, "A New Set of

International omparisons f Real Product and Price Levels Eatimates or130 countries," eview of Income and Wealth, March 1988.1988 estimates updated from 1985 figures by utilizing ational data oneconomic growth rates.


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It appears that the Far Eastern NICs started gaining on the Lat ^

American NICs already in the 1963-73 period; per capita incomes doubled in the

Far Eastern NICs, much surpassing he performance f any of the Latin American

countries. Tne Far Eastern NICs increased heir lead during the period of the

oil crises, notwithstanding heir reliance on imported etroleum, hile

Argentina uffered declines in per capita incomes.

Differences n economic performance ncreased urther in the period

of the debt crisis. The Far Eastern NICs experienced ncreases in per capita

incomes by one-half to four-fifths. In turn, apart from small gains in

Brazil, incomes per head fell in the Latin American NICs. In this connection,

reference ay be made to differencss n the foreign debt situation. There is

a contrast etween the high degree of foreign indebtedness f Latin American

countries nd the low exter al debt of the Far Eastern NICs (see further

below).

III. Domestic Savings and the Efficiency f InvestmentVariuus factors may be introduced o explain differences n growth

performance etween the Far Eastern and the Latin American newly-

industrializing ountries. They include differences n domestic saving ratios

and investment fficiency, s well as the changing relative importance f

exports. Increases n domestic savings ratios and in investment fficiency

add to GDP directly hile exports have indirect ffects.

A comparison f the Far Eastern and Latin American NICs does not show

overall differences n domestic saving ratios in the 1963-73 period while

there were considerable ifferences ithin each group. The superior rowth

performance f the Far Eastern NICs during this period is thus e)plained y

their higher investment fficiency hich is measured, however imperfectly, y


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in^remental apital-output atios (ICOR). 1 Among Latin American NICs,Drazil and Mexico had low incremental apital-output atios (Table 2).

The situation anged in the 1973-81 period. All Fir Eastern NICs

increased heir domestic saving ratios to a substantial xtent while the

increases ere smaller, or domestic saving ratios declined, in the La .

American NICs. At the same time, the Far Eastern NICs maintained igher

levels of investment fficiency han their Latin American counterparts. An

apparent exception is Mexico where newly-found il raised GDP growth rates,

thereby reducing incremental apital-output atios.

In the 1981-87 period, negative GDP growth rates in Argentina and

Mexico do not permit deriving meaningful stimates incremental apital-

output ratios. Growth rates in Brazil and Chile continued o fall behind

those of the Far Eastern NICs.

IV. The Role of Exports

The Far Eastern NICs attained high rates of economic growth in an

open economy as shown by their high export-GDP ratios (Table 3). Nor can

these differences e explained y disparities n country size. Thus, while

Brazil and Mexico have large economies, orea's population nd GDP are greater

than Argentina's nd Taiwan's population nd GDP are greater than Chile's.

In Korea and Taiwan, the export-CDP ratio increased reatly between

i963 -nd 1988, indicating he leading role of exports in the growth process.

This was the cas6, to a lesser extent, in Hong Kong and Singapore hat already

had high export-GDP ratios at the beginning f the period. At any rate, the

1/ ICORs fail to allow for the effects of factors other than capital oneconomic growth and are subject to considerable easurement rror. Theyare derived from national accounts statistics.


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Table 2GDP Growth Rates. Domestic Savincs Ratios.

and Incremental Cgpital-Output Ratios

1963-73 1973-81 1981-88

Country GDP Domestic ICOR GDP Domestic ICOR GDP Domestic ICORrowth Saving Growth Saving Growth Savingate Ratio Rate Ratio Rat* RatioHONG KONG 8.9 24.3 3.6 9.1 29.0 3.4 7.3 29.3 3.9KOREA 9.3 13.0 2 0 7.7 23.7 4.0 10.1 31.0 2.8SINGAPORE 10.3 16.5 3.1 7.8 32.8 5.0 6.1 41.8 _-OTAIWAN 11.1 24.4 1.9 8.0 32.8 3.7 7.9 33.8 2.8ARGENTINA 5.0 20.5 4.2 1.1 24.2 20.2 -0.0 16.3 -925.9BRAZIL 8.2 26.3 2.2 5.3 21.2 4.9 3.0 21.8 5.9CHILE 2.6 14.3 7.5 3.7 14.2 4.5 1.6 15.9 9.2MEXICO 7.4 19.2 2.7 6.7 22.1 3.4 -0.0 26.2 -905.6

Source: World Bank data base.

Note: ICOR = Incremental capital-output ratio.


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Table 3Export and TqWort Shares

(per cMnt)

Export/GDP Ratio Import/GDP Ratio

1963 1973 1981 1988 1963 1973 1981 1988HONG KONG 39.0 49.8 48.5 5'.1 75.4 74.1 83.6 117.2KOREA 2.3 23.7 30.4 35.4 14.6 31.3 37.3 30.2SINGAPORE 124.5 86.5 151.0 164.2 153.4 121.5 198.5 183.3TAIWAN 15.3 41.2 47.7

51.8 16.7 35.7 44.7 38.2ARGENTINA 10.0 4.6 7.4 10.2 7.2 3.1 7.6 5.9BRAZIL 6.0 7.8 8.9 9.5 6.3 8.8 9.1 4.5CHILE 11.6 12.1 11.5 31.9 13.6 10.7 19.2 21.9MEXICO 5.1 4.4 8.0 11.9 7.4 6.9 9.9 11.2

Sources: United Nations and World Bank. Data relate to merchandise trade.

a


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figures for these countries re nuch affected by entrep6t trade. The results

are further affected by the importation f inputs for prncessing o export

that raised the ratio for Singapore bove 100 percent. l/

Export-GDP atios increased uch less in the Latin American NICs than

in Korea and Taiwan. In Mexico's case, the oil finds raised the export-GDP

ratio; in Chile, an even larger increase ccurred as economic policy shifted

in an outward-oriented irection fter 1973.

Export expansion in the Far Eastern NICs involved n increasing hift

towards manufactured oods. In Korea, the share of manufactured oods in

total exports rose from 45 percent in 1963 to 93 percent in 1988; in Taiwan,

the corresponding igures were 38 and 92 percent (Table 4). Smaller changes

occurred in Hong Kong that already had a 92 percent manufactured xport share

in 1963 and in Singapore here entrep6t trade in primary products is of

importance.

The share of manufacture d xports increased lso in the Latin

American NICs, but it remained lower than in the Far Eastern NICs. The

relevant shares for 1963 and 1988 are: Argentina, and 32 percent; Brazil; 3

and 48 percent; Chile, 4 and 15 percent; and Mexico, 17 and 56 percent.

Data on manufactured xport share ere affected by the availability f

natural resources, n particulav opper in Chile. At the same time, interest

attaches to per capita manufactured xports that provide an indication f a

country's success in these export products.

1/ In any case, export values and value added (GDP) are not strictlycomparable.


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Table 4Commodity Composition of Exports

(per cent)

1963 Foels Non-fuel Manufac- Other TotalPrimary tured

Goods Goods

HONG KONG 0.0 7.8 91.7 0.5 100.0KOREA 3.0 51.8 45.1 0.2 100.0SINGAPORE 16.7 52.3 27.8 3.3 100.0TAIWA,. 0.9 61.0 38.0 0 0 100.0ARGENTINA 0.8 93.4 5.7 0.0 100.0BRAZIL 0.7 96.1 3.0 0.2 100.0CHILE 0.0 96.0 3.9 0.2 100.0MEXICO 4.5 78.4 17.0 0.1 100.0

1973 Fuels Non-fuel Manufac- Lner TotalPrimary tured

Goods Goods

HONG KONG 3.3 96.5 0.2 100.0KOREA 1.1 14.7 84.0 0.2 100.0SINGAPORE 19.8 33.8 44.3 2.1 100.0TAIWAN 0.3 16.0 83.6 0.1 100.0ARGENTINA 0.2 77.4 22.4 0.1 100.0BRAZIL 1.3 77.1 19.6 1.9 100.0CHILE 0.2 96.i 3.7 0.0 100.0MEXICO 0.9 57.1 41.9 0.0 100ioo

1981 Fuels Nor-fuel Manufac- Other TotalPrimary tured

Goods Goods

HONG KONG 0.1 3.0 96.5 n.4 100.0KOREA 0.7 8.7 90.0 .5 100.0SINGAPORE 27.3 16.8 48.2 7.7 100.0TAIWAN 1.9 9.2 88.7 0.1 100.0ARGENTINA 6.8 73.6 19.6 0.0 00.0BRAZIL 5.1 54.3 39.1 1.5 100.0CHILE 1.8 90.2 7.7 0.3 100.0MEXICO 72.1 17.0 10.1 0.0 100.0

1988 Fuels Non-fuel Manufac- Other TotalPrimary tured

Goods Goods

HONG KONG 0.2 3.2 95.4 1.2 100.0KOREA 1.0 5.7 93.3 100.0SINGAPORE 12.5 13.2 70.3 4.0 100.0TAIWAN 0.6 7.4 91.8 0.2 100.0ARGENTINA 1.5 66.8 31.6 0.0 100.0BRAZIL 4.1 48.1 47.8 100.0CHILE 0.9 84.1 15.0 100.0MEXICO 30-7 13.6 55.8 100.0


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Table 5 shows the rapid expansion f manufactured xports in the Far

Eadtern NICs. These exports were negligible in Korea and Taiwan in 1963 but

reached $1349 per head in the first case and $2786 per head in the second in

1988. The rate of expansion as slower in Hong Kong and Singapore hat

started with a higher base (nearly $180 per head in both cases in 1963). But

the absolute figures are much higher ($4683 in Hong Kong and $10398 in

Singapore n 1988), although a portion of the total represents re-exports.

The per capita manufactured xpcrts of the Latin American NICs are

dwarfed by those of the East Asian NICs. In 1988, these exports were only

$140 per head in Mexico, $112 per head in Brazil, $90 per head in Argentina,

and $83 per head in Chile.

V. T e Policies pplied

The data show that, for the 1963-88 period as a whole, superior

growth performance n the Far Eastern newly industrializing ountries as

associated ith high domestic saving ratios and high levels of investment

efficiency. At the same time, exports played an important ole in the growth

process, contributing o the efficient se of investment unds.

Apart from Hong Kong, all developing ountries passed through the

first stage of import substitution, nvolving he replacement y domestic

production f the imports of nondurable consumer goods and their inputs. The

manufacture f these products, including lothing and textiles, hoes and

leather, nd furniture nd wood, conform to the production ossibilities f

the developing ountries. They utilize in large part unskilled labor, involve

the use of simple production rocesses, re not subject to im.portant cale

economies, nd do not require the existence f a sophisticated ndustrial

structure.


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Table 5Per Capita ExDorts of Manufactured Goods

(US S)

1963 1973 1981 1988

HONG KONG 179.7 866.9 2664.7 4682.5

KOREA 1.5 79.2 492.8 1349.3

SINGAPORE 175.0 730.0 4139.0 10398.0

TAIWAN 10.8 237.7 1110.8 2785.8

ARGENTINA 3.7 29.4 62.6 90.4

BRAZIL 0.5 12. 73.4 111.8

CHILE 2.6 4.7 25.5 83.0

MEXICO 3.7 19.6 28.5 139.9

Sources: United Nations and World Bank.

0


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Once the first stage of import substitution as been completed,

however, the rate of growth of industrial roduction annot continue to exceed

that of consumption. Now, countries face two choices: embarking n the

exportation f nondurable onsumer gcods and their inputs or moving to the

second stage of import substitution hrough the replacement y domestic

production f the imports of producer nd consumer durables and intermediate

products.

Among present-day ewly-industrializing ountries, the choice was

made for the first alternative n Korea, Singapore, nd Taiwan in the early

1960s. These countries lso carried out financial eforms that permitted

raising domestic saving ratios.

Negative real interest rates (nominal interest rates exceeded by the

rate of inflation) ed to financial epression in the Latin American NICs that

was not conducive o increasing omestic saving and to the efficient

allocation f the amount saved. And, these countries shifted to the second

stage of import substitution hat proved costly as the commodities n question

did not conform to the production ossibilities f the countries oncerned.

Thus, the manufacture f producer and consumer durables requires the

existence f a sophisticated ndustrial tructure o provide parts,

components, nd accessories ade to precision. Also, such vertical

specialization, s well as a horizontal r product specialization, eed a

large domestic market for manufactured oods.

Large domestic markets are also necessary for the production f

intermediate oods, where traditional conomies f scale obtain. Furthermore,

the manufacture f producer and consumer urables relies to a considerable

extent on skilled and technical abor while intermediate roducts are highly


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capital intensive. At the same time, the margin of transformation or

intermediate roducts is often small and can be squandered hrough the poor

organization f production.

The resulting igh domestic costs reduced the efficiency of

investment in countries ursuing a strategy of continued import

substitution. In order to compensate for the higher costs, these countries

also increased mport protection, hereby discriminating gainst exports.

As the costs of continued mport substitution ecame apparent,

leading to declines in export expansion and economic growth, the three large

Latin American NICs undertook reforms aimed to provide improved incentives o

exports in the mid-1960s. The most far-reaching eforms were carried out in

Brazil while its favorable alance-of-payments osition, due to workers'

remittances, ourism, and border industries, ampered the reform effort in

Mexico and the opposition f urban interests bstructed the course of economic

reforms in Argentina.

The reforms undertaken in the mid-1960s permitted educing the bias

of the incentive system against exports in Brazil, to a lesser extent in

Mexico, and even less in Argentina. But, not even Brazil provided equal

incentives o exports and import substitution s was the case in the Far

Eastern NICs. Finally, after initial efforts, reforms were jettisoned y the

Allende government in Chile in the early 1970s.

Policies changed again following the oil crisis of 1973-74. The

quadrupling f oil prices, together ith the ensuing world recession, mposed

a considerable ost on the economies of the nearly-industrializing


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Table 6

External Shocks and Policy Responses o External Shocks

External hocks Additional et Export Promotion Import Deflationary(Z of GDP) External inancing Substitution Policies

(Z of External hocks)

1974-78 Hong Kong na na na na naKorea 10.5 -88 90 128 -30

Singapore 20.9 42 11 -24 70Taiwan 7.2 -92 14 96 82Argentina 0.5 -168 -13 146 136Brazil 3.3 30 15 66 -11Chile 6.0 -48 71 18 60Mexico 1.2 123 -70 33 14

1979-81 Hong Kong na na na na naKorea 9.4 -18 -7 8 116Singapore 30.4 39 89 -59 31Taiwan 13.1 -40 27 91 22Argentina 1.2 423 -109 -281 67Brazil 2.5 -33 38 49 47Chile 3.9 257 50 -133 -74Mexico -0.5 309 412 -756 -64

Source: World Bank

For explanation, ee text.


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countries. This cost, shown in Table 6, was the largest in the East Asian

NICs that were most exposed to foreign trade. I/

Table 6 further shows the balance-of-payments ffects of t'e policies

applied in response to external shocks, including dditional et external

financing, xport promotion, import substitution, nd deflationary olicies.

Additional net external financing as been derived as the difference etween

actual financing nd that estimated n assumption hat past trends in exports

and imports continued. The effects of export promotion ave been calculated

in terms of changes in export market shares. Import substitution as been

defined as savings in imports associated ith a decrease in the income

elasticity f import demand compared ith the preceding eriod. Finally, the

effects on imports of changes in GNP growth rates in response to the

macroeconomic olicies followed have been estimated n the assumption f

unchanged income elasticities f import demand.

The Far Eastern newly-industrializing ountries ccepted an initial

decline in the growth rate of GNP in order to limit reliance n external

financing. Economic rowth accelerated ubsequently, owever, as the

countries in question maintained their outward oiiented policies. At the same

time, adopting realistic xchange rates helped not only exports but also

import substitution.

Among the Latin American newly-industrializing ountries, hile

shifted to outward oriented policies in response o the external shocks it

suffered. These policies led to considerable ains in export market shares

1/ The cost of external shocks is measured as the balance-of-payments ffectsof the deterioration f the terms of trade and of the export shortfall,resulting rom the slowdown of the world economy.


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while reliance on external financing as reduced. In turn, Brazil and Mexico

relied to a considerable xtent on external borrowing n order to finance the

adverse balance-of-payments ffects of external shocks while, self-sufficient

in petroleum, rgentina experienced ractically o external shocks.

The three large Latin American NICs also increased he extent of

inward orientation f their incentive ystem, thereby promoting the

replacement f imports by domestic production. Only Brazil, which continued

with the export subsidies introduced in the preceding eriod, made some modest

gains in exports; Argentina and Mexico lost export market shares.

The effects of the policies followed in regard to foreign borrowing

are apparent in Table 7 that shows considerable ncreases n the external

indebtedness f Brazil and Mexico between 1973 and 1978. By contrast, orea

and Singapore xperienced decline and Taiwan's external debt remained very

small.

Having found oil that led to rapid export expansion, he ratio of

external debt to exports declined in Mexico after 1978. Also, Brazil reduced

reliance on external borrowing and adopted a mixture of policies aimed at

increasing xports, import substitution, nd slowing the economy. In turn,

Argentina nd Chile experienced considerable apital inflow as a result of

the overvaluation f the exchange rate aimed to reduce inflation.

The Far Eastern NICs again accepted a slowdown in economic growthafter 1978 in order to limit reliance on foreign borrowing hile maintaining

their outward oriented policies that led to the subsequent cceleration f

economic growth. Only Korea engaged in foreign borrowing ut its debt-export

ratio hardly changed.


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Table 7External Debt Ratios

(per cent)

External Debt/Exports Debt Service/Exports

1973 1978 1981 1988 1973 1978 1981 l9SQ

HONG KONG . . .

KOREA 95.2 100.8 121.0 52.4 16.8 12.8 21.7 13.5

SINGAPORE 12.5 10.0 7.7 10.1 1.8 4.1 1.4 1.9

TAIWAN . . . .. . .

ARGENTINA 171.6 169.4 302.0 512.0 36.7 42.3 45.7 43.6

BRAZIL la3.9 371.0 299.5 314.3 27.0 57.5 66.0 50.2

CHILE 223.1 247.1 279.0 232.5 16.1 53.6 64.e 25.3

MEXICO 185.9 313.2 283.0 319.1 38.6 65.1 51.9 48.9

Source: World Bank data base.

Note: Exports of non-factor and facto- services are included in the figures.


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- 17

The results of alternative olicies are apparent in che debt

situation f the NICs on the eve of the debt crisis. While in Korea the debt-

export ratio was 1.1 in 1981, this ratio reached 3.3 in Chile, 2.8 in Brazil,

2.7 in Mexico, and 2.5 in Argentina. Also, debt-service atios ranged between

90 percent (Chile) and 56 percent (Mexico) in the Latin American NICs,

compared ith 24 percent in Korea. These high ratios necessitated orrective

action on the part of the Latin American NICs, leading to a decline in their

per capita incomes after 1981. By contrast, rowth continued in the Far

Eastern NICs, where Singapore nd Taiwan accumulated net asset position

abroad.

VI. Conclusion

This paper has reviewed economic developments n the Far Eastern and

Latin American newly industrializing ountries. The results show that the Far

Eastern NICs attained much larger increases n per capita incomes than their

Latin American counterparts n the 1963-88 period.

Differences n economic growth rates find their origin in differences

in savings ratios and investment fficiency. While savings ratios differed

little between the two groups of countries etween 1963 and 1973, these ratios

increased ubstantially n the Far Eastern NICs in subsequent ears as they

employed easures encouraging avings.

Investment efficiency as higher in the Far Eastern NICs than in the

Latin American NICs throughout he period. The Far Eastern NICs achieved high

levels of investment fficiency in the framework f an open economy, with high

and rising ratios of exports to the gross domestic product. Export expansion

involved n increasing shift towards manufactured oods.


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- 18 -

Exports in the Far Eastern newly industrializing ountries ere

promoted by the system of incentives hat entailed no discrimination, r

limited discrimination, gainst exports. These countries also relied to a

considerable xtent on export promotion in response to external shocks and did

not engage in excessive foreign borrowing.

The favorable xternal-debt ituation f the Far Eastern NICs also

augurs well for their future economic growth. Korea's external debt ratio

declined to 0.5 in 1988 as it had a large trade surplus in 1988 when Taiwan

and Singapore lso increased heir surpluses. In turn, the external debt

ratio reached 5.1 in Argentina, 3.2 in Mexico, 3.1 in Brazil, and 2.3 in Chile

in 1988.

The experience f the Far Eastern and Latin American newly

industrializing ountries rovides important essons to other developing

countries. It indicates he superiority f outward-oriented olicies that

provide similar incentives o exports and import substitution. It also shows

that the continuation f outward-oriented olicies permits overcoming he

effects of external shocks while reliance on external borrowing reinforces he

adverse effects of these shocks.

Countries that have accumulated xternal debt, then, should adopt

outward oriented policies that provide impetus to economic growth through

increased xports while improving he balance of payments. Such policies

involve the simultaneous romotion f exports and liberalization f imports.


22/23

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WPS425 The Earmarking f Government William A. McClearyRevenues n Colombia Evamaria Uribe Tobon

WPS426 Growth-Oriented Adjustment Riccardo FainiPrograms: A Statistical Analysis Jaime de Melo

Abdel Senhadji-SemlaliJulie Stanton

WPS427 Exchange Reform, Parallel Markets Ajay Chhibberand Inflation n Africa: The Case Nemat Shatikof Ghana

WPS428 Perestroyka and Rs Implications Bela Balassa May 1990 N. Campbellfor European Socialist Countries 33769


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PRE Working Paper Series

ContactIls Aulhor 2aa for ga2er

WPS429 An Analytical Review of Ghanas Merrill J. BaternanCocoa Pricing Policy with Alexander MeerausRecommendations or Future David M. NewberyPolicy Formulation William Asenso Okyere

Gerald T. O'Mara

WPS430 Rural-Urban Growth Linkages n Peter B. HazellIndia Steven Haggblade

WPS431 Recent Developments n Marketinn Panos Varangisand Pricing Systems or Agricultural Takamasa kiyamaExport Commodities n Sub-Saharan Elton ThigpenAfrica

WPS432 Policy Choices n the Newly Bela Balassa May 1990 N. CampbellIndustrializing Countries 33769

WPS433 Education and Development: Wadi D. HaddadEvidence or New Priorities Martin Carnoy

with Rosemary Rinaldiand Omporn Regel

WPS434 Tax Sensitivity of Foreign Direct Anwar ShahInvestment: An Empirical Joel SlemrodAssessment

Policy Choices in the Newly Industrializing Countries

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